What are FHA loans?

An FHA loan is a flexible mortgage program offered by a participating lender like Hometown Mortgage. FHA home loans are insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD).

FHA Home Loan

FHA loans are mortgages insured by the Federal Housing Administration.  FHA loans allow for a down payment as low as 3.5% with a 580 credit score.  If the buyers FICO score is between 500 and 579, then they will be required to have a down payment of 10%.  Popular among first time home buyers, FHA loans support buyers with limited savings or a lower credit score.

All FHA loans require mortgage insurance, called Mortgage Insurance Premium (MIP).  You will pay an upfront mortgage insurance premium and an annual MIP.  The upfront premium is 1.75% of the loan amount and the annual premium ranges from 0.45% to 1.05% of the average balance of the loan for that year.

The borrower’s debt-to-income ratio must be less than 43%.  The home must be the borrower’s primary residence and they must show consistent income and proof of employment.

FHA loans will allow for a 100% gifted down payment, whereas a conventional loan will not.  This means if you are not able to provide the down payment money yourself, a friend or relative can give/gift you the money.  A gift letter will need to accompany the financial gift.


(link for gift letter)

FHA 203(k) Loan

An FHA 203(k) is a loan that allows you to borrow money to both buy or refinance and renovate a primary residence.  If you want to buy or refinance a home that needs work or updating, a FHA 203(k) allows you to roll the renovation costs into the mortgage loan.  Because these loans are insured by the Federal Housing administration, you may get more favorable terms and expand your homebuying options.  There are some restrictions on what type of improvements you can pay for with an FHA 203(k).

In general, the work must be completed by a licensed contractor, and will need approval by an FHA appraiser.  With certain types of FHA 203(k) loans, a HUD consultant will be required to oversee the renovations.  In addition, the renovations must be completed within six months.


Two types of FHA 203(k) Loans:

FHA 203(k) Standard

With this loan, improvements must cost at least $5,000.  Major structural repairs are eligible; however, a HUD consultant must be hired to oversee the renovations.

FHA 203(k) Limited

This mortgage will loan up to $35,000 for the improvements, but major structural repairs are not eligible.  For instance, if the home needs a new roof or a load bearing walls need to be reinforced or replaced, the FHA 203(k) limited would not be the right loan for the project. Improvements that make the home more functional or esthetically pleasing, would be eligible for 203(k) limited.

FHA Refinance Loans

Cash-Out Refinance

This refinancing option is beneficial to homeowners whose property has accumulated equity.  This means that the property has increases in market value since the home was purchased.  A new appraisal will be required and per the appraisal, there will need to be at least 20% equity in the property to qualify.

The borrower must have a credit score of 580 or higher.

The home must be the borrower’s primary residence.

All FHA loans require mortgage insurance premium (MIP).

There are debt to income requirements and the borrower will have to show employment and income stability and history.

This type of loan is often used to pay off debt, for college tuition, paying off a car loan or purchasing a car or for home improvement projects.

Streamline Refinance

The purpose of this type of loan is to reduce your monthly payment by reducing the interest rate on your already existing FHA loan.

The main requirement for this type of loan is that the borrower has paid their mortgage on time for the previous 12 months.  The mortgage to be refinanced must already be an FHA loan.  This means you are already a good credit risk.  This also helps the process to be simple, and often requires less documentation and underwriting.

There must be a net tangible benefit to the borrower.  This will vary depending on the terms of the refinanced loan, but the government wants to know that the refinance is good for the borrower.